The BIG Guide to Sole Trader vs Limited Company (2026/27)

This is one of the most common questions we get.

“Should I stay a sole trader or set up a limited company?”

The honest answer?

It depends.

Not very satisfying, we know, but it is true.

There is no universal “best” structure. The right answer depends on your income, your plans, your admin tolerance, and sometimes life events you would not immediately think about, like moving house or going through a separation.

So this is the big guide to help you understand the difference.

No jargon. No clickbait. Just the bits that actually matter.

First: what is the difference?

Sole trader

You and the business are the same thing.

That means:

• you keep the profits after tax

• you pay tax through Self Assessment

• you are personally responsible for the business

• the setup is usually simpler and cheaper to run

If you need to register, guidance is here:

https://www.gov.uk/register-for-self-assessment

Limited company

A limited company is its own legal entity.

That means:

• the company earns the money

• the company pays Corporation Tax on its profits

• you usually take money out as salary, dividends, pension contributions, or a mix

• the company has more admin and filing responsibilities than a sole trade

You can register a company here:

https://www.gov.uk/set-up-limited-company

The tax differences for 2026/27

Let’s start with the numbers.

For England, Wales and Northern Ireland, the main income tax figures for 2026/27 are:

• Personal Allowance: £12,570

• basic rate: 20%

• higher rate: 40%

• additional rate: 45%

If your income goes over £100,000, your Personal Allowance starts disappearing. That creates an effective 60% marginal band until your allowance is fully gone.

Scotland: what changes?

If you are a Scottish taxpayer, the main difference is income tax.

Scottish income tax applies to wages, self-employed profits, pensions and most other taxable income. Dividends and savings interest are still taxed under the same UK-wide rules as the rest of the UK.

For 2026/27, the Scottish Parliament agreed these rates and bands for Scottish non-savings, non-dividend income:

• Personal Allowance: £12,570

• Starter rate: 19% from £12,571 to £16,537

• Basic rate: 20% from £16,538 to £29,526

• Intermediate rate: 21% from £29,527 to £43,662

• Higher rate: 42% from £43,663 to £75,000

• Advanced rate: 45% from £75,001 to £125,140

• Top rate: 48% over £125,140

That means the maths for sole traders versus limited companies can look a bit different for Scottish clients, especially once profits move into the higher and advanced bands.

So if you live in Scotland, the “best” structure can shift slightly compared with someone on the same profit in England, Wales or Northern Ireland.

National Insurance for sole traders

For sole traders in 2026/27:

• Class 4 National Insurance is 6% on profits between £12,570 and £50,270

• Class 4 National Insurance is 2% above £50,270

There is also no standard Class 2 charge if your profits are above the lower profits threshold, although voluntary Class 2 can still matter for some people with lower profits.

So yes, sole traders still get hit by tax plus National Insurance on profits.

Corporation Tax for limited companies

For 2026/27, limited companies pay:

• 19% on profits up to £50,000

• marginal relief between £50,000 and £250,000

• 25% once profits reach £250,000

After that, you then look at how you personally take money out of the company.

That is where a lot of the planning happens.

Dividend tax for 2026/27

For 2026/27, dividend tax rates are:

• 10.75% at the ordinary rate

• 35.75% at the upper rate

• 39.35% at the additional rate

The dividend allowance remains £500.

That means the old “dividends are hardly taxed” line is even less true than it was before.

Why people stay sole traders

For a lot of people, especially early on, simple wins.

Sole traders often like it because:

• there is less admin

• bookkeeping is usually simpler

• accountancy costs are often lower

• the money is yours without having to think about salary versus dividends

• it is usually easier to understand

Typical examples include:

• freelancers

• plumbers

• electricians

• builders

• hairdressers

• side hustlers

• consultants just starting out

Sometimes people also prefer how it feels commercially.

In some industries, clients are perfectly happy dealing with an individual rather than a company.

Why people go limited

Usually, the reason is a mix of tax planning, flexibility and presentation.

A limited company can start to look more attractive when profits grow, particularly once you are consistently earning more than you actually need to spend personally.

Why?

Because a company gives you more planning options around:

• salary

• dividends

• pension contributions

• timing of income

• leaving some profit in the company for future use

That does not mean limited is always better.

It just means you have more levers to pull.

The bit the internet usually gets wrong

A lot of people online say:

“Once you earn £X, you should go limited.”

Real life is messier than that.

There is no magic number that automatically makes a company the right answer.

Here are some of the real things that affect the decision.

Getting a mortgage or remortgaging

This matters more than people expect.

Changing structure can change how your income looks on paper.

If you are about to apply for a mortgage or remortgage, the timing of a switch can make your income evidence messier than it needs to be.

Sometimes it is better to wait.

Moving house

Very similar problem.

If you are about to move, keeping your income evidence straightforward can matter more than chasing a small tax saving.

Timing matters.

A high-earning partner

Household income can change the maths.

If your partner already has a high income, your own income may get pushed into:

• higher rate tax

• additional rate tax

• or awkward territory where allowances disappear faster than expected

That can make company planning more attractive in some cases.

Divorce or separation

Not a fun topic, but it can matter.

When life is already complicated, some people value simplicity and clean income evidence more than tax efficiency.

In other cases, ownership and control become more important.

The right structure during a major life event is not always the same as the right structure in a calm year.

Some clients prefer companies

In some industries, a limited company can look more established.

In others, clients do not care at all.

And in some trades, people actively prefer hiring an individual.

Perception should not drive the whole decision, but it is part of the real-world picture.

Income that jumps around

Lots of people sit right on the edge.

One year they earn £42,000.

Next year £68,000.

Then back down again.

If profits move around a lot, the “best” structure can change over time.

And sometimes people quite reasonably decide:

“I would rather keep it simple.”

That is a perfectly valid answer.

Making Tax Digital will affect the conversation

From 6 April 2026, Making Tax Digital for Income Tax starts applying to some sole traders and landlords.

If your qualifying gross income from self-employment and property is over £50,000, you will need to use compatible software and keep digital records.

That means:

• recording income and expenses digitally

• sending quarterly updates to HMRC

• submitting a year-end tax return through software

This is important because the threshold is based on qualifying income, not profit.

So for some people, this makes sole trade admin less attractive than it used to be.

For others, it changes very little.

Payments on account: the tax surprise a lot of sole traders hate

If you are a sole trader, you may end up dealing with payments on account.

This means you can be asked to pay part of next year’s bill in advance based on the previous year’s tax bill.

In practice, that often means:

• one payment by 31 January

• another payment by 31 July

• each one usually being half of the previous year’s bill

Example:

You owe £5,000 for the year.

You may have to pay:

• £5,000 for the year just ended

• £2,500 as the first payment on account

• another £2,500 six months later

That is how people suddenly find themselves staring at a £10,000 cashflow hit and wondering what on earth happened.

This catches a lot of new sole traders by surprise.

Guidance is here: https://www.gov.uk/understand-self-assessment-bill/payments-on-account

When people usually switch to a company

Common triggers include:

• profits growing to the point where the extra admin starts to feel worth it

• wanting to leave money in the business rather than draw it all personally

• bringing in a spouse or business partner

• hiring staff

• wanting a more formal structure

• wanting more flexibility around pension funding and profit extraction

But again, there is no automatic switch point.

The honest answer

Some people stay sole traders forever.

Some switch to a company after a year.

Some switch later.

Some run a limited company and separate sole-trader work at the same time.

The right answer depends on:

• profit levels

• cash needs

• mortgages and house moves

• family situation

• industry expectations

• risk tolerance

• how much admin you are willing to deal with

Tax matters.

But tax is only one piece of the puzzle.

Final thought

The question is not really:

“Which structure pays less tax?”

The better question is:

“Which structure works best for my life right now?”

Because businesses change. Income changes. Life changes.

And your structure can change too.